The Great Depression: Easier to Describe What DIDN'T Cause It

 The Great Depression of the United States saw a period of economic despair and government expansion. For decades, economists debated responses and the consequences of those responses. The greater debate occurs when examining the actual cause of the Depression with most economists and historians pointing to a more complex cause including multiple factors. With the US economy being a complex system linked to domestic production and global trade, no single event can accept blame for the Depression. A complex, interconnected set of policies and events over a period of two decades contributed to a perfect storm of economic collapse. The major factors include “easy money” policies, President Herbert Hoover’s government interventionism, Franklin Roosevelt’s interventionism through the New Deal, and government actions such as labor laws, which created and accelerated the crisis.

An argument can be made that both World Wars I and II served as bookends to the Great Depression and the policies that created it. Historians and economists begin the debate pointing out several events and policies that then lead to that perfect storm of years of economic despair. As soldiers returned home from World War I, they returned more globally aware. Many soldiers left rural towns they never left prior to the war. They returned with a new perspective that transitioned into the “Roaring Twenties”. Government economic policies from both President Calvin Coolidge and the Federal Reserve created a surplus in available cash as well as an expansion of available credit amounting to $500 million. By 1925, this expansion resulted in over $4 billion of credit expansion. Between 1921 and 1929, the volume of farm and urban mortgages doubled in the US. Interest rate drops added to the rush to take advantage of the easy credit. This created a massive boom but one built on massive debt. By 1928-29, the markets began self-correcting with interest rates sliding up to normal levels. The boom slowed down which resulted in the slowing of the economy. October 1929 saw a tightening of policies that resulted in higher interest rates and a drop in confidence in the markets. On October 24^th, the stock market witnessed the bubble popping through the “Black Thursday” crash.[1]

Prior to this market correction, earlier corrections even in the 1800’s were resolved on their own or with minimal government interference. Recovery usually resulted within a year or two. This crash actually drew in government intervention from the beginning. President Herbert Hoover wasted no time urging Congress for action to stave off any further decline. The Federal Reserve’s mismanagement added to those woes. The Reserve’s initial response created a 30% drop in the nation’s money supply. Hoover’s response was the recently passed Smoot-Hawley Tariff Act. The goal was to push for high tariffs on imports to promote buying of American goods to boost the domestic economy. Hoover’s push for substantially high tariffs created trade wars from global markets. US exports, primarily agricultural, plummeted, which expanded the Depression to the middle and working class families. In a three year period, US exports fell from $5.5 billion to $1.7 billion. Farm loans were called in as farmers lost land owned for generations.[2]

Government response saw a creeping effect of control over the economy. Hoover’s initial policies increased the government’s share of GNP by a third. Hoover pushed for subsidies for rail lines, ship-building, and farming. The Revenue Act of 1932 doubled the level of income taxes paid by Americans. Taxes on gas, checks, telegraphs, telephones, and automobiles spread the pain to even more Americans. At the local level, city, county, and state governments were forced to increase taxes to offset their own losses. The fiscal burden of government on the people went from 16% to 29%.

Franklin D Roosevelt’s election in 1932, brought even more government interventionist policies. Roosevelt and the majority Democratic controlled Congress ignored interventionist failures of the previous administration. The Democrats moved forward with their massive government restructuring through the New Deal programs. The minimum wage was increased while work weeks were limited to 35 hours for industrial workers and 40 for white collar workers. Unemployment increased to 13 million and 500,000 Blacks in the South lost their jobs.[3] Hoover’s farm subsidies were increased to record levels but offered little relief to farmers across the country. More money was printed and pumped into the economy to help boost purchasing power. Labor unions were given extraordinary powers for contract bargaining, strikes, and labor disputes. Unions utilized these new powers in ways that crippled industry in most Northern cities.[4]

It was a culmination of events building upon previous events that not only created the Great Depression but prolonged it all the way until the US entering World War II. Most economists and historians will look at the war as the stopping point of the Great Depression for the simple fact that the US had entered a war economy as well as a massive pool of labor now returning to work in the form of military service. The policies of Coolidge, Hoover, and Roosevelt presented good intentions to better the American economy. Each President’s actions only created instability that passed on to the next President, who in turn created further instability. The situation that began after the American return from war saw itself ending with yet another return to war.

Bernanke, Ben S. "The Macroeconomics of the Great Depression: A Comparative Approach." Journal of Money, Credit and Banking 27, no. 1 (1995): 1-28.

Cecchetti, Stephen G. and Georgios Karras. "Sources of Output Fluctuations during the Interwar Period: Further Evidence on the Causes of the Great Depression." The Review of Economics and Statistics 76, no. 1 (1994): 80-102.

Crafts, N. and P. Fearon. "Lessons from the 1930s Great Depression." Oxford Review of Economic Policy 26, no. 3 (2010): 285-317.

Taylor, Jason E. "Work-Sharing during the Great Depression: Did the 'President's Reemployment Agreement' Promote Reemployment?" Economica (London) 78, no. 309 (2011): 133-158.

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[1] Stephen G. Cecchetti and Georgios Karras. "Sources of Output Fluctuations during the Interwar Period: Further Evidence on the Causes of the Great Depression." The Review of Economics and Statistics 76, no. 1 (1994): 80-102. 

[2] Ben S. Bernanke. "The Macroeconomics of the Great Depression: A Comparative Approach." Journal of Money, Credit and Banking 27, no. 1 (1995): 1-28.

[3] Jason E. Taylor.  "Work-Sharing during the Great Depression: Did the 'President's Reemployment Agreement' Promote Reemployment?" Economica (London) 78, no. 309 (2011): 133-158.

[4] N. Crafts and P. Fearon. "Lessons from the 1930s Great Depression." Oxford Review of Economic Policy 26, no. 3 (2010): 285-317.